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THE  INVESTMENT  OF 
TRUST  FUNDS 

FRANK  C.  MORTIMER 


THE  LIBRARY 

OF 

THE  UNIVERSITY 

OF  CALIFORNIA 

LOS  ANGELES 


THE  INVESTMENT  OF 
TRUST  FUNDS 


BY 

FRANK  C.  MORTIMER 


SAN   FRANCISCO 

ROLLIN   C.   AYRES 

PUBLISHER 

1909 


Copyright,  1909,  by 
ROLUN  C.  A  YRES 
San  Francisco ,  Cat. 


a^nc>'yn 


PREFACE 

Laws  have  been  passed  in  several  States  to 
regulate  and  restrict  the  investment  of  trust 
funds,  including  savings  bank  deposits,  which 
are  classed  as  trust  funds.  In  many  of  the 
States,  however,  the  selection  of  investments  is 
left  to  the  trustee,  except  when  acting  under  in- 
structions of  the  trustor  or  of  a  court  of  law. 

There  have  come  to  public  notice  recently 
several  cases  of  financial  loss  to  trustees  because 
of  the  inferior  kind  of  investments  selected.  This 
has  caused  it  to  be  inferred  that  there  are  many 
persons  who  are  not  familiar  with  the  precautions 
to  be  observed  in  selecting  securities. 

It  is  desired,  therefore,  to  venture  some  sug- 
gestions to  individual  trustees  exercising  this 
discretionary  power,  which  may  assist  in  the 
selection  of  sound  investments.  The  suggestions 
may  also  be  of  some  value  to  those  who  are  under 
the  mistaken  impression  that  high  rates  of  interest 
accompany  safe  investments. 


The  desirable  classes  of  securities  described 
herein  are  of  the  standard  required  of  securities 
in  the  laws  which  have  been  passed  in  these  several 
States  to  restrict  trust  fund  investments. 

The  book  is  necessarily  limited  in  extent ;  but 
the  investments  recommended,  and  classified  in 
the  schedules,  are  intended  to  serve  as  a  guide. 
These  can  be  referred  to  by  trustees  and  others, 
to  determine  whether  an  oifered  security  pos- 
sesses the  necessary  features  of  safety,  or  tends 
toward  a  speculation.  F.  C.  M. 

BeekeIoEY,  Cai.., 
January  2,  1909, 


CONTENTS 

PAGE 
Peeface    7 

Teust  Funds  and  Teustees 11 

The  Teust  Company  17 

Undesieable  Investments 19 

Bankees  and  Bond  Houses 23 

Investments  in  Bonds 26 

Government  Bonds 29 

Municipal  Bonds 30 

Railroad  Bonds 33 

Public  Service  Corporation  Bonds  ....  37 

Savings  Bank  Deposits 39 

Real  Estate  Mortgages 42 

Schedule  I,  Safe  Investments 45 

Schedule  II,  How  to  Invest  a  Teust 
Fund  of  Ten  Thousand  Dollars 46 


THE  INVESTMENT  OF 
TRUST  FUNDS 


TRUST  FUNDS  AND  TRUSTEES 

TRUST  FUNDS  ARE  MONEYS,  or 
other  forms  of  convertible  wealth,  held  by 
one  individual,  company  or  corporation 
for  the  benefit  of  another. 

A  trust  is  defined  as  the  confidence,  or  the 
obligation  arising  from  the  confidence,  reposed 
in  a  person  called  the  trustee,  to  whom  the  legal 
title  to  property  is  conveyed  for  the  benefit  of 
another,  called  the  cestui  que  trusty  that  he  will 
faithfully  apply  the  property  according  to  such 
confidence.^ 

The  creator  of  the  trust  is  called  the  trustor 
or  settlor.  The  person  who  holds,  controls  and 
acts  as  general  agent  in  the  management 
of  property,  for  the  use  and  benefit  of  an- 
other, is  called  the  trustee.  The  person  for  whom 
the  property  is  held  and  who  has  a  beneficial  title 
or  ownership  and  who  is  specified  to  receive  the 
profits  and  proceeds  of  the  trust  is  called  the  bene- 
ficiary, or  cestui  que  trust. 

The  person  who  creates  the  trust  has  faith  in 


^Siand.  Diet.,  p.  1939. 


The  Investment  of  Trust  Funds 

the  ability  and  integrity  of  the  trustee  to  prop- 
erly manage  and  invest  the  property.  When 
funds  are  placed  in  the  hands  of  an  individual, 
in  trust,  the  transfer  originates  in  a  feeling  of 
confidence  in  the  trustee's  faithfulness.  Espe- 
cially is  this  true  when  no  restrictions  are  placed 
upon  the  trustee  in  the  matter  of  making  invest- 
ments. It  may  be  noted,  therefore,  that  in  addi- 
tion to  the  legal  responsibility,  there  exists  on  the 
part  of  an  individual  trustee  a  moral  responsi- 
bility of  the  highest  form. 

The  nature  of  some  trusts  delegates  to  the 
trustee  the  responsibility  of  making  investments, 
and  his  individual  discretion  may  be  exercised  in 
allotting  funds  for  this  purpose.  In  fulfilling 
his  duties  in  this  connection  more  than  ordinary 
care  is  expected,  notwithstanding  a  law  which 
requires  simply  the  exercise  of  ordinary  care  and 
judgment. 

Trust  funds  may  pass  under  the  control  of  a 
trustee  while  acting  in  the  capacity  of  an  execu- 
tor, administrator  or  guardian.  Frequently  the 
terms  of  a  trust  specify  the  kind  of  investments 
to  be  made.    In  other  cases  a  Probate,  Surrogate 


12 


Trust  Funds  and  Trustees 


or  Orphan's  Court  exercises  supervision  of  the 
trustee's  acts  in  this  particular. 

A  trustee  is  morally  and  legally  required  to 
maintain  good  faith  toward  his  beneficiary  and 
should  not  make  use  of  the  trust  property  for  his 
own  financial  gain,  or  for  the  gain  of  anyone 
except  the  beneficiary.  Nor  should  any  advan- 
tage be  taken  of  the  beneficiary,  resulting  in 
direct  or  indirect  loss  to  him. 

A  separate  account  of  trust  property  should 
be  kept  because  the  mingling  of  trust  funds  with 
other  property  places  a  liability  upon  the  trustee 
for  its  safety  in  all  events.  If  trust  funds  have 
not  been  kept  apart  from  the  personal  property 
of  the  trustee,  and  profits  have  been  derived  from 
the  combined  fund,  the  beneficiary  is  entitled  to 
a  detailed  account  of  the  profits  and  to  his  share 
of  the  earnings.  In  some  cases  the  trustee  has 
been  required  to  pay  interest  for  the  use  of  the 
money. 

A  beneficiary  may  request  a  statement  show- 
ing the  condition  of  the  trust  and  is  entitled  to 
receive  the  information.  A  court  will  enforce 
the  rights  of  a  beneficiary  in  tliis  particular. 


13 


The  Invest:ment  of  Trust  Funds 

When  the  fund  and  its  profits  come  into  the 
possession  of  the  trustee  he  should  deposit  the 
money  in  bank  to  the  credit  of  an  account  in  his 
name,  as  trustee.  Ordinary  business  prudence  is 
required  in  the  selection  of  a  depository.  It  is 
suggested  that  the  trustee  select  one  of  the  older 
and  stronger  banks.  The  bank  that  holds  to 
methods  that  are  conservative,  during  times  of 
great  prosperity,  is  one  that  is  unimpaired 
during  periods  of  financial  unrest.  The  money 
may  be  kept  in  bank  until  a  sufficient  amount 
has  accumulated  to  permit  the  making  of  an 
investment. 

Funds  that  are  not  to  be  used  immediately 
for  the  payment  of  the  obligations  of  the  trust, 
or  for  debts  due  within  a  short  time,  should  be 
invested  in  order  that  the  principal  of  the  fund 
may  be  augmented  as  much  as  possible  for  the 
benefit  of  the  beneficiary.  For  example,  the  law 
of  one  of  the  States  provides  that  a  trustee  must 
invest  money  received  by  him  under  the  trust  as 
fast  as  he  collects  a  sufficient  amount,  in  such 
manner  as  to  aff*ord  reasonable  security  and  in- 
terest for  the  same.^ 


^Civ.  Code  Cal.;Scc.  2261. 

14 


Trust  Funds  and  Trustees 


A  court  may  be  appealed  to  for  instructions 
and  will  aid  the  trustee  in  the  performance  of  his 
duties.  When  the  aid  of  a  court  is  invoked  to 
determine  upon  the  investments  to  be  made,  the 
responsibility  is  assumed  by  the  court  and  the 
trustee  must  thereafter  act  under  its  control. 

A  trustee  who  fails  to  place  the  trust  fund 
in  a  position  to  earn  an  income,  although  it  be 
from  a  desire  to  keep  the  principal  intact,  would 
be  subject  to  censure  by  the  proper  authorities 
and  possible  removal  from  trusteeship  because  of 
neglect  of  duty.  In  addition  to  this,  he  would 
probably  be  required  to  pay  interest  on  the  trust 
fund  because  of  his  omission. 

Trust  funds  do  not  differ  from  other  funds 
in  regard  to  their  earning  power.  They  have 
the  same  capacity  for  producing  revenue  and  are 
not  intended  to  remain  idle  and  unproductive. 

The  earning  power  of  money,  during  normal 
financial  conditions,  is  variously  estimated  at 
from  four  to  six  per  cent,  per  annum.  It  can  be 
seen,  then,  that  it  is  a  trustee's  positive  duty  to 
employ  the  trust  fund  at  a  fair  rate  of  interest. 

What  constitutes  a  fair  rate    of    interest? 


15 


The  Investment  of  Teust  Funds 

What  income  must  the  trustee  secure  to  satisfy 
the  parties  concerned  and  Hve  up  to  his  obliga- 
tion? These  questions  can  best  be  answered  in 
the  words  of  a  Massachusetts  judge,  who  says 
that  "a  trustee  must  look,  first  to  the  security  of 
the  trust  fund,  with  income  as  a  secondary  con- 
sideration." 

The  whole  matter  of  investments,  therefore, 
is  resolved  down  to  safe  securities.  The  profits 
from  the  trust  fund  should  be  gained  from  those 
investments  that  are  classed  as  conservative  and 
the  rate  of  interest  the  beneficiary  should  receive 
is  the  rate  paid  by  safe  securities. 

Without  risk  of  endangering  the  principal, 
it  is  usually  possible  for  a  trustee  to  secure  four 
and  one-half  per  cent,  interest  on  his  investments. 
This  is  generally  considered  a  fair  rate  and  a 
trustee  who  returns  his  trust  fund  unimpaired, 
together  with  interest  at  the  rate  of  four  and  one- 
half  per  cent,  will  have  done  his  duty  sufficiently 
and  well. 


16 


THE  TRUST  COMPANY 

Should  the  trustee  feel  that  the  responsibility 
of  selecting  investments  is  beyond  his  capacity, 
or  that  such  duties  might  interfere  with  the  man- 
agement of  his  own  affairs,  he  may  petition  the 
court  to  appoint  another  to  act  in  his  stead. 

There  has  developed  during  recent  years  an 
institution  known  as  the  trust  company,  which  is 
legally  qualified  to  act  in  matters  of  a  fiduciary 
character.  Trust  companies  operate  under  State 
laws,  and  are  required  to  deposit  securities  with 
the  State  to  guarantee  the  faithful  performance 
of  their  duties.  The  fees  for  services  are  regu- 
lated by  law,  and  are  the  same  as  those  allowed  to 
an  individual  acting  in  the  same  capacity.  They 
possess  advantages  over  the  individual  trustee 
because  they  have  a  permanent  place  of  business 
with  regularly  established  hours.  They  are  im- 
personal and  are  not  incapacitated  by  sickness, 
nor  is  their  judgment  liable  to  be  impaired.  A 
beneficiary  has  the  advantage  of  the  combined 


17 


The  Investment  of  Trust  Funds 

judgment  of  the  officers,  who,  through  experience, 
have  a  special  fitness  to  properly  execute  their 
trusts.  Some  of  the  modern  trust  companies  are 
higlily  developed  in  their  proficiency  as  trustees. 
A  trustee,  therefore,  who  wishes  to  relinquish 
his  position  can  do  so  without  jeopardizing  the 
interests  of  his  beneficiary  or  betraying  the  confi- 
dence of  the  trustor,  by  petitioning  for  the  ap- 
pointment of  a  trust  company,  duly  authorized  by 
law  to  perform  his  duties. 


18 


UNDESIRABLE  INVESTMENTS 

Over  six  per  cent,  cannot  be  realized  upon  the 
best  class  of  securities,  with  the  possible  excep- 
tion of  real  estate  mortgages.  Sometimes,  when 
there  is  a  financial  upheaval,  good  securities  are 
sold  at  low  prices  and  the  rate  of  income  is  above 
this  figure.  Under  normal  conditions,  however, 
an  assorted  lot  of  first-class  securities  will  yield 
not  more  than  four  and  one-half  per  cent, 
interest. 

Perhaps  this  point  can  be  more  clearly  im- 
pressed by  citing  the  instance  of  the  trustee  who 
invested  his  trust  fund  in  the  stock  of  a  promis- 
ing concern.  The  beneficiary  was  dependent 
upon  the  income.  It  was  a  tempting  investment 
and  assm-ances  were  made  by  the  seller  that  it 
would  yield  large  returns.  The  trustee  acted 
independently,  and  did  not  consider  it  necessary 
to  consult  his  banker.  Had  he  done  so,  he  would 
have  been  cautioned  to  avoid  the  high  interest 
promising  investment  in  favor  of  a  lower  interest 


19 


The   In\^stment   of   Trust   Funds 

paying  security.  Several  months  passed  and  no 
returns  came  to  hand  from  the  investment.  Fi- 
nally the  stock  was  offered  for  sale  and,  as  is 
usual  in  such  cases,  there  were  no  buyers.  The 
trustee,  who  was  a  man  of  integrity,  then  as- 
sumed the  investment  personally,  paying  over 
the  amount  of  the  trust  fund  to  a  banker  for 
proper  investment. 

It  is  not  an  infrequent  occurrence  for  trustees 
to  deplete  trust  funds  and,  when  cited  to  appear 
to  render  an  account,  plead  lack  of  judgment  as 
a  defense.  They  depend  upon  this  to  protect 
them  in  their  mistakes.  The  courts  frequently 
require  them  to  make  good  the  discrepancies  and 
suffer  the  losses,  notwithstanding  that  their  in- 
tentions were  good  and  their  honesty  unques- 
tioned. 

A  trustee  may  overlook  the  fact  that,  as  trus- 
tee, he  is  not  in  a  position  to  make  investments 
that  an  individual  can  discreetly  make.  When  a 
trustee  overhastily  subscribes  to  a  tempting  offer- 
ing he  places  the  trust  fund  in  jeopardy.  It  is 
well  to  consider  the  high  interest  paying  security 
entirely  out  of  the  calculation.    When  made  by 


20 


Undesirable  Investments 


individuals  they  usually  require  close  attention 
and  cause  considerable  uneasiness.  While  there 
is  no  definite  rule  to  determine  a  trustee's  respon- 
sibility for  loss,  except  in  those  States  whose  laws 
designate  the  investments  to  be  made,  there  is  a 
tendency  to  hold  him  liable  for  losses  that  may 
accrue  as  a  result  of  mis  judgment. 

Consider,  for  a  moment,  the  risk  that  is  taken 
when  the  fund  is  turned  into  securities,  or  other 
forms  of  indebtedness,  promising  to  yield  a  high 
rate  of  income.  High  interest  rates  are  an  in- 
ducement to  attract  the  unwary  investor.  They 
are  offered  by  those  who  are  unable  to  secure 
money  at  the  prevailing  rate  from  capital- 
ists, who  ordinarily  have  abundant  funds  for 
good  investments.  An  investment  that  has  merit 
is  usually  financed  locally  or  through  the  large  in- 
vestment brokers,  who  are  in  touch  with  capital 
awaiting  an  opportunity  to  be  safely  employed. 

The  interest  rate  is  the  best  index  to  the  class 
of  securit3^  When  a  promise  of  large  returns 
accompanies  an  offering,  it  is  branded  as  undesir- 
able for  trust  funds  because  it  has  the  stamp  of 
risk  upon  it. 


21 


The  In^t:st]vient  of  Trust  Funds 

To  the  trustee  it  is  suggested  that  funds 
should  not  be  invested  in  notes,  secured  or  unse- 
cured, mining  stocks  or  bonds,  or  plantation  se- 
curities. It  is  best  to  avoid  stock  investments 
entirely,  as  a  stockliolder  is  Hable,  as  such,  for  a 
portion  of  the  debts  of  the  corporation.  Real 
estate  should  not  be  purchased  for  speculation, 
nor  should  merchandise  of  any  description.  In 
this  connection  one  can  mention  as  undesirable, 
chattel  mortgages,  accounts  payable,  due  bills, 
life  insurance  policies,  unsecured  debentures,  un- 
listed securities  and  bonds  of  a  non-productive 
or  non-dividend-paying  corporation. 

Constructive  bonds  of  new  railways  are  fre- 
quently offered  at  favorable  rates  and  possess 
advantageous  features  for  an  individual  invest- 
ment; but  if  the  trustee  is  careful  in  the  appor- 
tionment of  his  fund,  he  will  avoid  this  class  of 
bonds  and  confine  his  investments  to  those  in 
concerns  with  an  established  revenue-producing 
capacity. 

An  individual  can  discreetly  undertake  some 
of  the  investments  mentioned  in  this  chapter. 
They  do  not,  however,  possess  an  underlying 
value,  which  is  essential  to  the  safety  of  trust 
money. 

22 


BANKERS  AND  BOND  HOUSES 

In  nearly  every  community  there  can  be 
found  a  banker  of  the  old  school,  connected  with 
a  bank  whose  officers  adhere  to  methods  that  have 
stood  the  test  of  time.  A  trustee  owes  it  to  his 
beneficiary  to  seek  such  a  bank  as  the  proper  place 
in  which  to  deposit  the  trust  fund.  Moreover,  as 
a  depositor,  the  trustee  should  feel  free  to  confer 
with  his  banker,  who,  while  guarded  in  his  rec- 
ommendations, can  be  relied  upon  to  keep  the 
trustee  from  danger  points  and  pitfalls  existing 
in  the  investment  market. 

There  are  also  well  known  bond  brokers  or 
investment  bankers,  whose  business  has  been  es- 
tablished for  a  number  of  years,  and  who  have 
a  reputation  for  integrity  among  investors  in 
general.  These  investment  firms  are  often  the 
medium  through  which  issues  of  bonds  are  sold 
to  banks,  who  desire  them  for  investment  pur- 
poses or  as  a  secondary  reserve. 

For  a  nominal  fee,  the  amount  of  which  is 
regulated  by  the  several  stock  exchanges,  the  de- 


23 


The  Investment  of  Trust   Funds 

tail  of  purchasing  bonds  may  be  turned  over  to  an 
accredited  investment  broker.  They  are  in  a 
position  to  select  investments  for  trustees,  and 
will  carry  out  clients'  orders  and  advise  with  them 
regarding  the  current  changes  in  the  value  of 
standard  bonds. 

It  is  now  a  well  established  custom  for  the 
reputable  investment  banker  to  employ  a  corps 
of  experts  to  investigate  the  security  contem- 
plated for  the  market.  The  services  of  expert 
accountants,  engineers  and  lawyers  are  enlisted 
to  pass  upon  the  legality  and  value  of  the  securi- 
ties under  consideration  to  be  sold  by  them. 

In  the  matter  of  investments  it  is  wise  to 
proceed  only  upon  the  advice  of  one  of  these 
responsible  banking  fii'ms.  Through  familiarity 
with  securities,  they  are  in  a  position  to  recom- 
mend investments  that  are  proper  for  trustees. 

Investments  are  frequently  made  by  inexpe- 
rienced persons  in  venturesome  schemes  and  dis- 
aster is  often  the  outcome,  because  they  lack  the 
necessary  knowledge  and  possess  immature  judg- 
ment in  these  matters.  There  seems  to  be  a  pre- 
vailing tendency  to  act  independent   of   advice 


24 


Bankers  and  Bond  Houses 


when  making  investments.  The  precaution  of 
seeking  the  counsel  of  the  banker  will  often  in- 
sure the  trustee  from  making  a  mistake  because 
there  are  certain  well  defined  lines  of  safety,  which 
those  of  experience  in  financial  affairs  can  usually 
determine,  and  from  which  they  do  not  depart. 


25 


INVESTMENTS  IN  BONDS 

A  part  of  the  trust  fund  can  safely  be  in- 
vested in  bonds.  Among  investments  there  are 
none  more  desirable  than  first-mortgage  bonds. 
About  one-half  of  the  trust  fund  should  be  ap- 
portioned to  this  class  of  security.  A  careful 
selection  can  be  made,  which  will  yield  an  income 
of  about  four  and  one-half  per  cent. 

Bonds  are  a  form  of  certificate  issued  by 
Governments  and  States.  They  are  also  issued 
by  counties  and  municipalities,  school  and  recla- 
mation districts,  public  service  corporations,  in- 
dustrial concerns  and  sometimes  by  private  indi- 
viduals. Bonds  are  an  obligation  to  pay  money 
and  are  ordinarily  secured  by  a  mortgage  on  some 
kind  of  property.  A  definite  rate  of  interest  is 
usually  stated  in  the  bond,  and  terms  for  the  re- 
payment of  the  principal  are  detailed. 

Coupon  bonds  are  provided  with  small  cer- 
tificates which  are  to  be  removed  at  stated  peri- 
ods.   Upon  presentation  of  the  coupons  at  a  des- 


26 


Investments  in  Bonds 


ignated  place  of  payment  the  interest  due  on  the 
bond  is  paid  to  bearer.  Registered  bonds  are 
recorded  in  the  owner's  name,  and  payment  of 
interest  due  is  made  by  check  to  the  owner's  order. 
Another  form  of  bond  issued  is  registered  in  the 
owner's  name,  with  coupons  payable  to  bearer. 

Because  they  are  more  easily  transferred  from 
one  to  another,  coupon  bonds  possess  a  small 
value  over  registered  bonds,  being  the  more  read- 
ily marketed.  A  registered  bond  is  transferrable 
at  the  will  of  the  owner,  and  aside  from  the  brief 
delay  in  making  the  transfer,  is  safer  to  hold 
than  a  coupon  bond,  which  is  payable  to  bearer. 
Coupons  and  interest  checks  may  be  deposited 
in  a  bank,  and  irmnediate  credit  is  usually  given 
for  the  amount  of  their  face  value. 

Bonds  are  ordinarily  in  denomination  of  one 
thousand  dollars.  Government  Bonds  are  issued 
in  larger  denominations.  ^lunicipalities  and 
others  issue  them  in  denominations  as  small 
as  fifty  dollars.  They  can  be  described  as  a  piece 
or  portion  of  a  mortgage,  distributed  among 
many  mortgagees  (or  bondholders,)  instead  of 
being  held  by  one.    They  permit  an  investor  to 


27 


The  Investment  of  Trust  Funds 

diversify  his  holdings,  and  thus  guard  himself 
against  the  risk  of  losing  his  entire  capital  in  one 
enterprise. 

Usually  the  interest  yield  on  bonds  ranges 
from  two  per  cent,  to  six  per  cent,  per  annum. 
Bond  investments  possess  desirable  features  over 
other  investments.  The  risk  of  depreciation  is 
offset  by  the  possibility  of  an  appreciation  in 
value.  Their  ready  sale  in  the  market  makes 
them  desirable  for  trust  funds  that  may  be  re- 
quired for  distribution  from  time  to  time.  It  is 
only  upon  rare  occasions  that  high  class  securities 
cannot  be  converted  into  cash,  as  when,  during 
the  height  of  the  panic  in  1866,  in  London,  there 
was  a  time  when  British  Consols,  which  corre- 
spond to  our  Government  Bonds,  were  not 
salable. 

Occasionally  a  good  purchase  can  be  made  in 
bonds  to  mature  within  a  short  time,  provided 
the  trust  fund  is  not  to  be  of  long  standing.  They 
can  sometimes  be  had  at  figures  slightly  better 
than  long  term  bonds,  which  are  preferred  by 
bond  brokers  and  syndicates,  who  buy  up  entire 
issues  as  permanent  investments. 


28 


Investments  in  Bonds 


Investments  in  bonds  should  be  distributed. 
That  is,  the  security  underlying  the  bond  should 
be  located  in  different  sections  of  the  country.  It 
is  not  considered  business  prudence  to  invest  the 
total  amount  of  a  fund  in  one  kind  of  security. 
Its  value  may  be  lessened  by  local  conditions. 
A  failure  of  crops  in  one  community  may  affect 
the  earnings  of  a  railroad,  or  the  overflowing  of 
a  river  destroj'^  an  electric  plant.  These  would 
be  calamities  confined  to  localities,  and  the  par- 
ticular railroad  securities  or  the  electric  power 
bonds  would  be  liable  to  depreciate  in  value  be- 
cause their  earning  power  would  be  reduced  or 
cut  off. 

Government  Bonds 

Government  Bonds  are,  of  course,  the  safest 
of  all  investments;  but  they  yield  only  meagre 
returns  in  interest.  The  National  Bank  Act  cre- 
ated a  market  for  Government  Bonds  and  they 
have  been  in  demand  by  banks  requiring  them  as 
security  for  the  issue  of  National  Bank  Notes. 
A  one  thousand  dollar  Government  Bond  selling 
at  the  rate  of  120,  or  twelve  hundred  dollars,  as 


29 


The  Investment  of  Trust  Funds 

is  the  case  of  the  four  per  cent,  of  1925,  at 
the  present  writing,  would  yield  only  about  two 
and  one-half  per  cent,  per  annum. 

There  are  other  kinds  of  bonds  yielding  a 
higher  profit,  which  are  considered  by  authorities 
to  be  equally  as  safe  as  Government  Bonds.  So 
firm  have  some  of  the  conservative  securities  es- 
tablished themselves  that  they  are  known  in  the 
market  as  "non-speculative."  Some  of  the  stand- 
ard bonds  fluctuate  in  price  only  slightly  from 
year  to  year,  and  the  slight  difference  in  market 
value  is  the  result  of  a  condition  of  the  money 
market  and  not  of  the  security. 

Municipal  Bonds 

The  necessary  features  of  safety  are  found 
in  bonds  issued  by  the  several  States  and  in 
bonds  of  cities,  counties,  towns  and  school 
districts.  The  reason  for  this  is  that  there  is  an 
assurance  that  both  principal  and  interest  will 
be  paid  when  due.  Taxes,  which  are  the  basis  of 
Government  finance,  are  pledged  for  their  pay- 
ment. Municipal  bonds  are  usually  issued  in 
strict  accordance  with  the  laws  of  the  several 


30 


Investments  in  Bonds 


States,  and  are  affirmatively  voted  upon  by  the 
tax-payers,  who  are  collectively  responsible  for 
their  payment.  Municipal  bonds  are  secured  by 
the  property  of  a  city  or  town  and  represent  the 
credit  and  good  faith  of  the  entire  municipality. 

The  municipal  bonds  selected  by  a  trustee 
should  be  those  of  municipalities  that  have  issued 
them  strictly  for  municipal  purposes.  The  mu- 
nicipal and  district  bonds  selected  should  be  those 
of  communities  that  have  not,  within  five  years 
previous  to  the  time  of  making  the  investment, 
defaulted  in  the  payment  of  any  part  of  either 
the  principal  or  interest  thereof. 

Under  the  provisions  of  an  amendment  to 
the  National  Banking  Laws,  municipal  bonds  of 
a  high  standard  are  now  accepted  as  security  for 
currency  issued  by  national  banks.  They  are  also 
legal  for  trustees'  investments  and  are  acceptable 
as  security  for  Government  deposits  with  na- 
tional banks. 

School  district,  reclamation  district  and  irri- 
gation district  bonds  are  good  investments  be- 
cause they  are  secured  by  some  kind  of  attach- 
able   property    of    recognized  value.     There  is 


31 


The  Investment  of  Trust  Funds 

usually  a  certainty  that  the  obligations  will  be 
met  when  they  fall  due.  As  the  property  owners 
in  the  district  are  directly  benefited,  they  are 
jointly  taxed,  in  order  to  provide  for  the  payment 
of  interest  and  principal.  A  portion  of  the  taxes 
collected  is  set  apart  to  retire  the  bonds ;  usually 
one  or  more  each  year. 

For  example,  a  town  in  Illinois,  with  a  popu- 
lation of  over  seventeen  thousand,  has  issued 
bonds  known  as  Township  High  School  Bonds. 
They  are  one  thousand  dollars  each  and  the  inter- 
est specified  is  four  per  cent.  They  sell  at  the 
rate  of  101.85;  which  means  one  thousand  and 
eighteen  and  a  half  dollars  for  each  one  thousand 
dollar  bond.  This  particular  high  standard  mu- 
nicipal bond  yields  tliree  and  eight-tenths  per 
cent,  per  annum.  Two  bonds  of  the  issue  will 
be  paid  off  annually. 

The  money  thus  secured  is  used  for  the  pur- 
pose of  erecting  a  high  school.  A  direct  tax  is 
levied  upon  all  taxable  property  in  the  township. 
It  is  a  manufacturing  center,  with  good  trans- 
portation facihties  by  rail  and  water.  The  total 
assessed  value  of  taxable  property  is  over  two 


32 


Investments  in  Bonds 


million  dollars  and  the  total  bonded  indebtedness 
is  only  eighty-five  thousand  dollars.  It  is  a  well- 
governed,  permanently  established  and  growing 
community.  Furthermore,  the  legahty  of  the 
bond  issue  is  certified  to  by  experts. 

These  kinds  of  municipal  bonds  are  consid- 
ered safe  investments  for  trustees.  This  is  em- 
phasized by  the  fact  that  the  Government  accepts 
them  as  security  for  emergency  currency  and 
they  are  legahzed  investments  for  sa\dngs  banks 
in  Maine,  New  Hampshire  and  Vermont. 

Railroad  Bonds 

The  bonds  of  some  of  the  great  railroads  that 
have  met  all  their  obligations  and  paid  dividends 
on  their  cormnon  stock  consecutively  for  ten  years  » 
past,  are  considered  good.  None  of  the  States 
whose  laws  restrict  investments  for  trust  funds, 
prescribe  a  longer  period  than  ten  years  as  a  nec- 
essary time  during  which  the  railroads  shall  not 
have  defaulted  in  payments.  This  is  presumed 
to  be  sufficient  time  to  prove  the  worth  and  sta- 
bility of  a  security. 

A  majority  of  States  permit  investments  in 


33 


The   In^t:stment  of   Trust   Funds 

railroad  and  street  railway  securities.  Savings 
bank  deposits,  which  are  generally  classed  as 
trust  funds,  may  be  invested  in  them,  except  in 
five  of  the  States.  Careful  inquiry  should  always 
be  made  by  the  trustee  to  determine  the  expira- 
tion of  franchises,  which  should  run  for  some 
time  after  the  bonds  become  due.  Railroad  de- 
bentures are  legalized  in  some  States  by  statute. 
A  debenture,  when  applied  to  the  obligation  of  a 
railroad,  is  a  note,  sometimes  secured  by  a  deposit 
of  bonds  with  a  trust  company ;  but  often  merely 
an  unsecured  note,  intended  to  mature  within  a 
short  time. 

A  recently  enacted  law  states  that  trust  funds 
in  the  form  of  savings  bank  deposits  may  be 
invested  in  the  debenture  stock  of  any  railroad 
company  owning  and  operating  a  line  of  railroad 
in  whole  or  in  part  within  the  State;  provided 
the  said  debenture  stock  shall  bear  at  least  four 
per  cent,  interest  per  annum,  and  shall  be  secured 
by  trust  deed  as  first  lien  upon  said  line  of 
railroad.^ 

First-class  railroad  bonds  are  good  invest- 
ments because  railroads  have  an  assured  income. 


^Rev.  Stat.  Minn.;  Sec.  2562. 

34 


Investments  in  Bonds 


They  traverse  large  territory  and  their  prof- 
its are  derived  from  the  people,  who,  through 
conditions,  find  it  necessary  to  use  their  facilities. 
The  great  railroads  are  possessed  of  valuable 
property  and  equipment,  without  which  the  af- 
fairs of  the  country  would  be  at  a  standstill. 

The  bonds  of  these  quasi-public  corporations 
are  secured  by  property  having  a  definite 
value,  which  is  pledged  as  security  for  the  pay- 
ment of  the  bonds.  First-class  railroad  bonds  are 
convertible  into  cash  during  any  business  day. 
At  the  time  of  the  recent  severe  financial  panic 
there  were  repeated  sales  of  good  railroad  bonds. 
While  they  brought  lower  prices,  the  depreciation 
was  only  of  a  few  points. 

A  selection  of  bonds  can  be  made  to  include 
those  of  one  of  the  trunk  lines,  whose  property 
is  located  in  the  densely  populated  sections ;  an- 
other in  the  coal  and  iron  regions;  another  in 
the  wheat  producing  community,  known  as  a 
"Northwest  Granger."  A  transcontinental  rail- 
road bond  may  be  deemed  desirable;  and  the 
bonds  of  some  of  the  Southern  railroads  will  be 
found  to  come  up  to  the  legal  requirements  of 


35 


The  Investment  of  Trust  Funds 

those  States  whose  laws  regulate  trust  fund 
investments. 

Among  safe  investments  in  bonds  can  be  men- 
tioned the  issue  of  a  railroad  corporation  whose 
securities  are  well  known  on  the  stock  exchanges. 
The  company  has  paid  dividends  on  common  stock 
consecutively  for  forty-eight  years.  There  are  to 
be  had  in  the  market  the  bonds  of  another  rail- 
road corporation  which  has  paid  dividends  on  its 
stock  for  forty-three  years.  Others  have  done 
the  same  for  thirty-six,  thirty-five  and  thirty 
years.  The  first-mortgage  bonds  issued  by  cor- 
porations of  the  above  class  can  be  depended  upon 
as  being  entirely  safe  for  trust  funds  because  the 
earning  capacity  of  the  lines  is  well  established. 

Another  example  of  a  high-class  bond  is  an 
issue  of  a  leading  railway  of  the  United  States. 
The  bonds  are  one  thousand  dollars  each  and  run 
for  thirty  years.  They  are  redeemable,  at  the 
option  of  the  company,  at  a  specified  time  before 
maturity  at  a  figure  above  par;  and  they  are  a 
direct  obligation  of  the  company,  which  has  paid 
dividends  on  its  capital  stock  uninterruptedly  for 
twenty-eight  years.    The  bonds  are  listed  on  the 


36 


Investments  in  Bonds 


stock  exchanges  of  London,  New  York,  Berlin 
and  Frankfort.  Their  desirability  can  be  recog- 
nized when  it  is  stated  that  they  are  accepted  by 
the  Treasury  Department  of  the  United  States 
from  national  banks  as  security  for  deposits 
which  the  Government  makes  with  them.  It  is 
by  this  means  that  a  national  bank  becomes  a 
United  States  depository. 

It  can  be  seen,  therefore,  that  a  trustee  takes 
no  risk  in  placing  his  money  in  securities  of  this 
kind.  With  the  exercise  of  ordinary  business 
prudence,  the  chances  of  loss  to  the  trustee  or 
his  beneficiary  are  far  removed. 

Public    Service    Corporation    Bonds 

Public  utility  corporation  bonds  can  be  pur- 
chased with  trust  funds,  provided  the  securities 
are  listed  on  the  stock  exchanges  and  possess  the 
necessary  qualifications  of  a  safe  investment. 
They  should  be  those  bonds  that  are  issued  by 
corporations  of  high  standing,  who  o^vn  valuable 
franchises,  such  as  the  right  to  supply  water,  gas, 
or  street  railway  transportation.  These  are  ser- 
vices now  considered  necessary  to  the  public  wel- 


37 


The   Investment  of   Trust   Funds 

fare.  As  the  earnings  of  these  corporations  are 
derived  from  the  pubHc  at  large,  they  are  more 
or  less  stable.  There  is,  therefore,  an  assured 
income  to  provide  for  the  payment  of  the  bonds. 
When  these  quasi-public  corporations  are  prop- 
erly managed,  their  service  is  brought  up  to  a 
high  standard  of  efficiency.  If  they  are  profit- 
ably conducted  their  bonds  have  a  permanent 
value.  When  such  is  the  condition  of  their  se- 
curities, they  are  usually  proper  investments  for 
trustees. 

In  suggesting  to  a  trustee  the  purchase  of 
only  fii'st-class  bonds,  it  may  be  inferred  that 
desirable  investments  cannot  be  made  in  stocks. 
On  the  contrary,  there  are  stocks  quoted  on  the 
exchanges  which  are  exceptionally  good  invest- 
ments. As  a  rule,  however,  when  trust  funds 
are  concerned,  purchases  should  be  confined  to 
the  securities  that  are  up  to  the  standard  required 
in  the  legislative  enactments  upon  the  subject  in 
the  several  States. 


38 


SAVINGS  BANK  DEPOSITS 

A  portion  of  the  trust  fund  should  be  invested 
in  a  savings  bank  deposit.  About  three-tenths 
of  the  fund  should  be  placed  in  a  bank  where  it 
will  yield  interest  at  from  three  and  one-half  to 
four  per  cent,  per  annum. 

A  savings  bank  can  be  described  as  an  agency 
for  the  investment  of  small  sums.  At  one  time 
they  were  considered  simply  as  a  place  for  the 
safe  keeping  of  money.  The  favorable  rates  of 
interest  now  paid  to  depositors  classes  a  savings 
bank  deposit  as  a  wise  and  profitable  kind  of  in- 
vestment. 

Rigid  laws  have  been  enacted  in  many  of  the 
States  restricting  the  uses  to  which  savings  bank 
deposits  may  be  employed  for  profit.  They  are 
generally  recognized  as  just  and  expedient  laws, 
and  the  result  is  that  the  element  of  risk  in  a  sav- 
ings bank  deposit  is  practically  eliminated.  Par- 
ticularly does  this  condition  exist  in  those  States 
whose  savings  banks  have  the  largest  amounts  on 


39 


The  Investment  of  Trust  Funds 

deposit,  and  the  largest  number  of  individual 
accounts. 

As  an  investment,  the  savings  bank  deposit 
possesses  many  advantages.  Aside  from  its 
safety,  it  can  be  added  to  and  withdrawn  from, 
usually  at  will.  It  is  only  when  the  withdrawals 
are  of  large  amount  that  notice,  according  to 
agreement,  is  required.  This  feature  should  not 
concern  the  trustee  because  he  can  provide  for 
the  payment  of  the  obligations  of  the  trust  by 
means  of  another  account,  kept  in  a  commercial 
bank. 

As  far  as  the  depositor  is  concerned,  there  are 
ordinarily  no  tax  payments  to  be  made  on  a  sav- 
ings bank  deposit.  For  this  reason  the  rate  of 
interest  paid  by  the  bank  is  a  net  rate  and  clear 
profit  to  the  owner  of  the  account.  This  is  an 
important  point  to  consider  when  contemplating 
investments  upon  which  taxes  must  be  paid. 
When  the  taxes  are  taken  into  consideration,  the 
income  from  some  investments  is  frequently  re- 
duced to  a  less  amount  than  paid  by  a  savings 
bank. 

If  the  trust  fund  is  of  considerable  amount  it 


40 


Savings  Bank  Deposits 


would  be  best  to  divide  the  portion  set  apart  for 
this  kind  of  investment  into  accounts  with  sev- 
eral banks  in  different  localities. 


41 


REAL  ESTATE  MORTGAGES 

In  the  event  that  the  trust  fund  is  to  remain 
under  the  management  of  the  trustee  for  a  con- 
siderable time,  about  one-fifth  can  safely  be  ap- 
portioned out  in  real  estate  mortgages.  That 
fii'st  mortgages  on  real  estate  are  a  satisfactory 
investment  is  demonstrated  by  the  fact  that  sav- 
ings banks  invest  the  greater  part  of  the  money 
deposited  with  them  in  this  kind  of  security.  Some 
banks  have  found  it  unnecessary  to  foreclose  a 
mortgage,  or  take  over  property  under  a  deed 
of  trust,  which  demonstrates  the  stability  and 
value  of  real  estate  security,  when  properly 
selected. 

None  but  first  mortgages  should  be  accepted, 
and  a  sufficient  margin  for  depreciation  should 
be  allowed.  While  real  estate  mortgages  possess 
the  disadvantage  of  not  being  marketable,  and 
cannot  be  disposed  of  in  part  or  at  a  premium, 
they  possess  stability  and  safety  to  offset  these 
features. 


42 


Re.\l  Estate  Mortgages 


Upon  appraisement  by  a  competent  judge  of 
real  estate  values,  it  would  be  safe  to  lend  up  to 
fifty  per  cent,  of  the  appraised  value.  After 
this  point  is  carefully  looked  after,  the  title  should 
be  searched.  If  there  are  improvements  on  the 
property,  insurance  should  be  pro\dded,  with  loss, 
if  any,  payable  to  the  trustee,  by  means  of  a 
mortgage  clause  attached  to  the  policy  by  the 
insurance  company.  When  the  mortgage  has 
been  executed  and  placed  of  record,  the  trustee 
should  retain  all  papers  and  keep  them  in  a  safe 
deposit  vault  with  other  papers  and  records  per- 
taining to  the  trust. 

The  financial  standing  and  integrity  of  the 
borrower  should  be  looked  into  when  making  a 
real  estate  loan.  A  careful  inquiry  into  his  busi- 
ness reputation  and  his  ability  to  meet  such  obli- 
gations will  sometimes  save  trouble  for  a  trustee. 

Expenses  of  consummating  a  loan  of  this 
character  are  usually  paid  by  the  borrower.  It 
is  now  legal  in  some  States  for  the  borrower  to 
pay  taxes  upon  the  mortgage.  From  six  to  seven 
per  cent,  net  can  be  secured  upon  this  kind  of 
investment. 


43 


The  Ina^stment  of  Trust  Funds 


*       *        *        *        *        *        *        -*        *        * 

Thus  it  can  be  seen  that  there  are  investments 
of  a  standard  character,  which,  if  selected  by  a 
trustee,  will  tend  toward  a  competent  manage- 
ment of  the  trust.  The  class  of  securities  sug- 
gested are  those  that  have  stood  the  test  of  time, 
and  are  considered  as  safe  as  human  foresight 
and  prudence  can  make  them. 

Moreover,  the  trustee,  in  confining  his  invest- 
ments within  the  line  of  established  safety,  will 
be  enabled  to  fulfQl  his  stewardship  with  satis- 
faction to  himself  and  his  beneficiary.  He  also 
will  have  faithfully  discharged  a  sacred  respon- 
sibility to  the  one  who,  in  creating  the  trust, 
placed  confidence  in  him. 


44 


SCHEDULE  I 
SAFE  INVESTMENTS 

The  elements  necessary  for  the  safety  of  trust 
funds  are  possessed  by  only  three  classes  of  in- 
vestments, viz: 

1.  BONDS 

(a)  Government,  State. 

(b)  Municipal,  ( County,  City,  Town,  School, 
District.) 

(c)  Railroad. 

(d)  Public  Service,  (Street  Railway,  Gas, 
Water,  Electric.) 

Features:  Minimum  fluctuation  in  market 
value ;  fair  rate  of  income ;  convertibilitj'- 
into  cash;  security  of  principal  and  in- 
terest; distribution  of  security;  maturity 
at  or  near  termination  of  trust. 

2.  SAVINGS  BANK  DEPOSITS 

Features :  Security  of  principal  and  interest ; 
privilege  of  increase  or  decrease  of 
amount;  convertibility  into  cash  at  or 
before  termination  of  trust. 

3.  REAL  ESTATE  MORTGAGES 

Features:  Stability  of  value;  safety  of  prin- 
cipal and  interest;  high  rate  of  income. 


45 


SCHEDULE  II 

HOW    TO    INVEST    A    TRUST    FUND 
OF    TEN    THOUSAND    DOLLARS 


Security 

Amount 

Net  Rate 

Annual 
Income 

Savings  Bank  Deposits 

Placed    in    two    savings 
banks  in  different  locali- 
ties. 

Real  Estate  Mortgages 

First     INIortgages ;     Not 
over   50%    of   appraised 
value. 

Railroad  Bonds 

Northwestern     Granger, 
Southern,    Trunk    Line, 
Coal  and  Iron  or  Trans- 
continental. 

Municipal  Bonds 
County,       City,     Town, 
School,  Reclamation  Dis- 
trict. 

Public  Service  Bonds 

Gas,     Electric,     Water, 
Street  Railway. 

$3,000 
2,000 
3,000 

1,000 
1,000 

47o 

61/2% 

4% 

31/2% 
41/2% 

$120 
130 

120 

35 
45 

Total 

$10,000 

41/2% 

$450 

46 


PAESS  OF  LACK  BROS.,  BERKELEY,  C«L. 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 

Los  Angeles 

This  book  is  DUE  on  the  last  date  stamped  below. 


AUG  1  7  .ggg 


Form  L9-42m-8,'49  (B5573)444 


rntfiv 


LIFORNM 


HG         Mortimer  - 
M8i;i     trust  funds 


AUG  17l2fiS 


HG 

U521 

I'jl8I|.i 


UC  SOUTHERN  REGIONAL  LIBR'-RV 


AA    000  578  360    o 


